PUT YOURSELF IN THE DRIVER'S SEAT:  Mind Your Firm's Dashboard As You Drive Toward Your Goal

Leader's Edge, September/October 2004
Author:  Robert J. Lieblein

If you didn’t glance at the RPMs when shifting from third to fourth or eye the fuel gauge or your oil level and engine temperature on the dashboard to assure your dream car actually gets you to your destination, you’d be driving blind. Dumb. The idea, of course, is to be a proactive driver. Smart.

So why would you not do the same when driving your brokerage firm? Why not check the gauges on your firm’s dashboard to measure the inner workings of your brokerage? Metrics are the dashboard gauges of your firm. Use them instead of driving your business into the ground.

As commercial lines distribution systems continue to witness product rate stabilization, many principals are scrambling to determine how they can continue to sustain growth and profitability. The answer, in part, lies in the brokerage’s ability to steer, fluidly and efficiently, a safe course for its business that will enable it to contend with the macro industry obstacles.

Metrics, which are financial measurements employed to provide in-depth insights into the underlying operations of a business, are key components that every manager should utilize to help monitor and manage during these periods of change. While many brokerage owners refuse to engage in this process, seeing it as administrative waste, the reality is they generally don’t understand how metrics work and how much of a key driver they are in building shareholder value.

Metrics help you work smarter, not harder.

First, Build a Solid Chassis
Just like you need a solid chassis for your car, you need a solid financial frame for your brokerage. This is a critical catalyst in managing your business and represents the difference between high performance and a marginal operation—the difference between the proactive brokerage and a fly-by-the-seat-of-the-pants operation.

Start with the budget and business planning process and your end result is geared toward keeping management better informed on how the business is performing. This process requires “what if” scenarios and should employ performance metrics and top line revenue and bottom line profit goals.

It must be drafted and implemented before beginning your fiscal year. A business plan should include tactical objectives assigned to the key managers who are responsible for implementation and financial incentives for management for achieving its goals. Management should always “own” the plan and, through the achievement of goals, should be rewarded. This strategic compensation rewards individuals for achieving strategic firm objectives versus individual goals.

What Are Metrics?
Metrics are dashboard items that enable management to better understand the underlying performance of their firm. They can easily be divided into four different categories. 

• Operational performance

• Market and financial performance

• Carrier and product performance

• Growth performance

Operational Performance
Metrics allow management to determine how well the operational process works—the measurement of internal efficiencies and proficiencies. Examples include:

• Revenue by headcount

• Profit by headcount

• Selling and administrative costs per employee

• Selling and administrative costs per revenue and profit

• Employee turnover.

By first focusing internally, management can make macro assessments of where the business is today relative to employee and operating costs. As an extension of these metrics, management should contrast results to peer groups to determine whether they fit in the top quadrant of firms, both regionally and nationally. Many firm owners are so out of touch with their basic operating performance that they are amazed when they learn how their firm compares with others in their peer group.

It is important to remember that this is just the first step in using metrics, and a detailed analysis of the results is an important step to understand how these operational metrics affect the firm. The key is not to react unfavorably to results, but to adjust and modify the operation in a continual and gradual progression toward greater efficiencies. 

The greatest successes stories I have seen are those brokerages that identify weaknesses in operational efficiency and navigate growth and profit performance to ultimately become a top tier performer solely by reengineering their internal processes.

Market and Financial Performance
Some contend this is the pivotal segment of measurement. Many brokerages lack the insights to understand where they are actually making money, whether by client, line of business, region or product. This area requires strong financial systems and also utilizes some cost accounting. Key metrics include:

• Revenue and profit by line of business

• Revenue and profit by product

• Revenue and profit by client (or client size)

• Revenue and profit by geographic territory

• Retention rates by line of business or product.

The best-performing brokerages are always in synch with their overall performance by these major metrics. However, I am always amazed at how few firms truly have the insight to understand where they are making money and where they are losing money. Let’s face it: not all lines of business, products, clients or territories are profitable. The results are sometimes astounding and allow management to shape its future direction based upon goals to improve profitability, which may involve exiting certain business lines, products or regions. Loss leading, complementary lines or regions may be viewed as vital to the business’s long-term mission or strategy. Therefore, it’s not an academic conclusion that success is driven from only being in highly profitable lines. This is a subjective or intuitive conclusion that must be drawn by management. The critical element is that management be able to identify and quantify the most and least profitable segments of their business to strategically shape its direction, prospectively. (Remember: work smarter, not harder.)

Carrier and Product Performance
Measuring metrics in this area dovetails with market and financial performance metrics and allows management to assess and quantify not only profit and loss by carrier and product but possibly contingent commissions that are often critical to the overall financial success of a brokerage (particularly small and mid-sized brokerages). Examples include:

• Revenue and profit by product

• Revenue and profit by carrier

• Loss ratios by carrier

• Loss ratios by product

• Revenue by premium dollar

• Retention rate by carrier and product

• First year and renewal commissions by carrier and product.

Successful brokerages typically assess underwriting performance by carrier and product and work in concert with marketing to identify product competitiveness with strong margins. This type of assessment is a key to meeting client needs by providing and leveraging the most profitable product, which in turn benefits the client and the brokerage. This proactive approach is critical for all successful brokerages to enable them to have a sound grasp on underlying metrics as they relate to carriers and products. The ongoing viability of a successful operation is highly dependent upon securing stable markets, which makes the ongoing measurement of this segment highly essential.

Growth Performance
This area isolates new business costs and profitability and is particularly important when continued rate stabilization appears imminent. Management must have a clear understanding of the direct costs associated with acquiring new business and must contrast and compare this with the cost of retaining and servicing existing clients. 

Some examples include:

• Cost per new client

• Cost per line of business or product

• Cost per average policy size

• Acquisition cost versus cost to grow organically.

The ability to measure metrics in this area requires a more sophisticated use of cost accounting to determine costs associated with sales, marketing, business development and some administrative allocation. With this said, the best and fastest growing firms typically will always embrace this form of metrics as it allows them to contemplate reinvestment requirements in continued growth.

Some brokerages use this cost approach, whether by policy or client, to determine thresholds of acceptable sized products and clients to pursue aggressively. Conversely, many have a clear understanding of the incremental earnings generated assuming certain retention rates. This allows management to understand the prospective contribution of the existing client base, whether it be on an aggregate dollar basis or on a per client or unit basis. Either way, it is important for management to understand both the prospective profit contributed for new business as well as the value accumulated in the existing client portfolio.

The Bottom Line
After reading this textbook explanation on the use of metrics you may have a look on your face that says “you’ve got to be kidding!” Let’s simplify. Picture your favorite jigsaw puzzle with the pieces spread out on the floor. What you have at this point is many critical components that individually do not give you a complete picture. Imagine the pieces put together and the big picture it creates. Metrics work in the same way. Analyze the pieces together and the big picture looks like this:

• Strategies for stronger, more profitable revenue growth

• A clearer understanding of allocation of costs and resources

• Greater ability to generate more efficiency and proficiency throughout the company

• Understandings of profitable versus unprofitable clients and markets

• Knowledge to leverage the most profitable markets, products, carriers and clients.

It should be of no surprise that the highest-performing brokerages use metrics as a key financial tool in measuring and monitoring performance. They use such tools in their drive to remain independent in a very competitive, consolidating market and also to reap significant increases in shareholder value year after year.

Survival of the fittest will rule in the changing market. Yet many successful brokerage owners still have no clue of how and why they were really profitable or what business risks are inherent in their firm. In today’s environment, only those businesses that adopt, implement and live by some form of financial metrics will be successful in the long term. The major public firms certainly utilize different variations of metrics that give them a competitive advantage. That’s why they are the leading distributors. All brokerage owners should consider some financial metrics to gain a competitive advantage and to help ensure future growth and profitability. While the exact use of metrics largely depends on the geographic territory, lines of business and size of the firm, it is critical to remember that in today’s environment, it is important to delve deeper into financial performance so that we all work smarter, not harder.